Net Stable Funding Ratio: Impact on Funding Value Adjustment

TL;DR

This paper explores how the Net Stable Funding Ratio influences Funding Value Adjustment, proposing a new framework to optimize funding strategies and minimize costs through a shortest path approach.

Contribution

It introduces a novel FVA framework aligned with NSFR and formulates the optimal funding strategy as a shortest path problem.

Findings

FVA framework effectively monitors costs related to NSFR levels.

Optimal funding strategies reduce overall funding costs.

Numerical experiments validate the proposed approach.

Abstract

In this paper we investigate the relationship between Funding Value Adjustment (FVA) and Net Stable Funding Ratio (NSFR). FVA is defined in a consistent way with NSFR such that the new framework of FVA monitors the costs due to keeping NSFR at an acceptable level, as well. In addition, the problem of choosing the optimal funding strategy is formulated as a shortest path problem where the proposed FVA framework is applied in the optimization process. The solution provides us with the optimal funding decisions that lead to the minimum funding cost of the transaction. We also provide numerical experiments for FVA calculation and optimization problem.